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E-Myth – “Why most small businesses don’t work & what to do about it”

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Accounting Outsourcing | What Are Other Expenses

It’s extremely important that business owners understand how to organize their income statement says accounting Outsourcing. Not only is it important for business owners to look at their income statements prior to making any financial decisions in their business. But also, they’re going to be able to understand the profitability of their business, make plans on how to grow their business, as well as obtain financing and successfully sell their business when needed if they have accurate income statements. If they don’t know how to separate out revenue of the business and revenue of the corporation as well as expenses of the business and expenses of the corporation, they could be making their income statements inaccurate unintentionally, which could negatively affect their business.

In order to understand how to avoid commingling the business expenses and corporate expenses, a business owner needs to understand the difference between the two. Accounting Outsourcing says that while there might be expenses of the corporation that are valid and belong on the income statement, they might not specifically relate to the Core Business. One great example of this is if a business owner has an investment in their corporation. The profit and loss for these Investments don’t belong on the part of the income statement that deals with the business. However, since they are investments of the corporation, they do have a valid place on the income statement, but in the other section. When business owners can understand this, they will be able to avoid commingling expenses on the income statement.

Another example of how to avoid commingling expenses on the income statement is if the corporation has a rental property. Accounting Outsourcing says it doesn’t matter if the rental property is commercial or residential, because it will be affected in the same way. People might have property taxes associated with this rental property. They might also have condo fees, parking fees, utility bills, or special assessments that all are legitimate expenses of the corporation because the property is owned by the corporation. However, if a business owner was to put these expenses in with the expenses of the business, it could quite easily make the company look like it is not profiting very much because of these additional expenses. This is why it’s incredibly important for business owners to avoid commingling the expenses of the corporation and the expenses of the business.

How it might affect the ability to get financing is if there are a lot of expenses that should be the corporations and they are commingled with the businesses, this is going to make the business look like it is not very profitable. Accounting Outsourcing says the business might be incredibly profitable, but the bank officer might not know it because the additional expenses are making the profit of the company looks so poor. For example, if a business owner gets a special assessment of $20,000, it might eat up all of the profits of their business, however, the business is doing quite well, and should get financing. This is why it’s very important not to commingle the two.

Accounting Outsourcing | What Are Other Expenses

Most business owners struggle with understanding their business financial literacy says accounting Outsourcing. This was proven in a survey done by the business called into it, who is the company that makes QuickBooks. They surveyed small business owners on their understanding of business finances. Respondents were asked questions about what is a balance sheet, how it would increase the cash flow of their business, and how to read their income statement. Out of all of the respondents, an overwhelming majority of them, 82% to be precise scored less than 70% on this quiz. That means there’s 30% of knowledge that most business owners don’t have. This can negatively impact their ability to understand the profitability of their business, how to increase the revenue, and how to grow their business.

One of the biggest challenges that business owners will have is learning how to read and understand their interim financial statements. Accounting Outsourcing says business owners need to be able to do this in order to make informed financial decisions in their business. Can they afford to hire more staff, or do they need to lay stuff off? Can they afford to run payroll and pay bills? Do they have enough money to buy an asset that’s going to make it possible for them to have more products in their business and grow their revenue? In order for a business owner to answer any of these questions, they must look at their interim financial statements including their balance sheets and their income statement.

If business owners are making mistakes on their income statement, they are failing to understand what the profitability of their business is, and if they need to grow their revenue or cut expenses. One of the most common mistakes business owners make is that they tend to commingle the other income and expenses of the Corporation with the core business. Many business owners wonder why corporate expenses and corporate income even belongs on their income statement. But accounting Outsourcing says that it is legitimate income and expenses of the corporation, which is why it belongs on the income statement. It just needs to be in a different place than of the core business, so that business owners can easily read their income statement and see the revenue, profits, and expenses of their business as well as of their corporation.

When do its owners understand that other expenses can include taxes, their own salary, loss from Investments, and the expenses associated with owning a rental property? By keeping these expenses separate, business owners will be able to understand more clearly what’s the revenue and expenses of their Core Business is, which will help them significantly make financial decisions. It’s very important that business owners start to do this as early as possible in their business says accounting Outsourcing. Because if they ever want to sell their business, or obtain financing, they’re going to need to provide several years of income statements. And if they are not showing to be profitable, at any point it could put their plans to obtain financing or sell their business in jeopardy.